Setting up a company in Brazil is not as simple as in most developed economies. The process of registration (and deregistration) contains various procedural steps that are time-consuming and formalistic. Below are the key issues you will need to consider once you decided to register a Brazilian company.
1. Have you decided on the type of company you would like to register?
The three main types of corporate structures in Brazil are the limited liability partnership (sociedade limitada), the sole shareholder company (EIRELI) and the corporation (sociedade anônima). The first two require only one shareholder and the last requires two.
Sociedades limitadas and EIRELIs are the simplest to maintain, while the sociedade anônima is the most complex. None of the entities requires Brazilian nationals as shareholders (except in some specific sectors), yet all of them require that executive directors be permanent residents of Brazil.
Click here for further details.
2. Have you selected a Brazilian resident to act as the company’s executive director? If so, have you undertaken a background search on this person and decided on the terms of appointment?
As explained above, all executive directors of Brazilian legal entities must be permanent residents of Brazil. Therefore, the first step is to select an individual who is suitable to act as the company’s director.
Once the individual is selected, it is strongly recommended that you obtain a background search on the person. Brazil is a very litigious jurisdiction, so you can generally find a lot of information about a person by undertaking court searches and checking public databases.
Finally, it is important to ensure that you have a detailed agreement in place for the appointment of the individual and that the agreement be customised for Brazilian law.
3. Have you decided on the individuals or legal entities that will hold shares in the Brazilian company? Have you considered setting up companies just for this purpose?
As explained above, you will only need one individual or legal entity for EIRELIs and sociedades limitadas. However, you will need at least two for sociedades anônimas (it can be one individual and a legal entity, two individuals or two legal entities).
Brazil does not have many double tax agreements and currently does not impose taxes on the payment of dividends. Depending on the taxation rules that apply to the parent company, selecting the right entities to hold the shares in the Brazilian subsidiary can have major tax benefits.
Moreover, despite the supposed limited liability that Brazilian companies offer, there are Brazilian laws that allow courts to hold shareholders liable for the company’s liabilities (note, however, that the Law of Economic Freedom which became law on September 2019 has provided greater protection to shareholders).
Registering new legal entities that do not hold substantial assets to act as vehicles for holding the Brazilian shares is often a valid strategy to minimise the risks involved in the Brazilian venture.
4. Have you selected a Brazilian resident to hold a power of attorney for the foreign shareholders of the Brazilian company?
All foreign shareholders of companies registered in Brazil must appoint a person to hold their power of attorney. The individual must permanently reside in Brazil and have the powers to:
- be served on behalf of the foreign shareholder; and
- “manage the entity’s assets and rights in Brazil”.
While not mandatory by law, invariably the attorney needs to have the power to represent the foreign shareholders before the Central Bank, tax authorities and the Companies Registry (Board of Trade). This is often a thorny issue from a corporate governance point of view, as the person has almost absolute powers over the company. Strategies to minimise corporate governance risk include:
- having third parties (often lawyers) who are not involved in the day-to-day activities of the Brazilian company to hold the powers of attorney; and
- appointing two individuals who need to exercise their powers jointly.
At times, foreign companies choose to appoint accountants to hold the powers of attorney for the foreign shareholders. This is far from ideal, as when tax authorities notify accountants for issues relating to the Brazilian company’s tax matters an inherent conflict of interest arises (for instance, where the foreign shareholders are given notice due to non-compliance with tax obligations).
5. Have you selected an accounting firm registered in Brazil?
Brazilian tax law is very compliance-heavy. All Brazilian companies with foreign shareholders must have a Brazilian accountant responsible for preparing its books and making all required filings.
Finding a suitable accountant who is familiar with international issues and speaks English well is often a challenge, especially for those companies on tight budgets. Once the accountant is selected, it is strongly recommended to have a detailed agreement customised for Brazilian law in place with the chosen accountancy firm.
6. Have you ascertained where the company be operating in Brazil?
The rate and formulas of State Sales Tax (“ICMS”) and Municipal Services Tax (“ISS”) will vary depending on the State and the Municipality where the company will operate. Click here for further information on taxes.
For businesses that sell goods, if the company is to have a distribution centre in more than one State, then a branch office will need to be registered. Different tax rates will apply for interstate transactions.
States and Municipalities often also offer tax breaks (and, in some cases, free land) for certain activities where the investments are substantial.
7. Have you selected a physical location where the company will be registered? Is the location suitable for the company’s objects?
All Brazilian companies must have a registered office with a unique address – you cannot have two companies that carry out the same activity registered at the same address. Unfortunately, Brazilian law does not accommodate for registered agents as in the United States and other jurisdictions.
In some circumstances, a company may use a virtual office for administrative purposes or if it is a service provider. Companies selling goods must own their warehouses or have a lease in place with a third-party warehouse. The warehouse needs to be suitable for the company’s operations and may be inspected by tax officers to confirm that it is suitable for the company’s operations.
8. Are you willing to disclose the full chain of control of the Brazilian company to the Brazilian banks and Federal Tax Department?
Brazilian law requires that foreign shareholders of Brazilian entities disclose the ultimate beneficiaries (ultimate beneficial owners or “UBOs”) all the way to the individual or publicly listed holding company – see further here.
Additionally, due to internal bank controls, all Brazilian banks request that the full chain of ownership of the Brazilian entity be disclosed.
9. Have you selected a name for the Brazilian company?
In general terms, company names in Brazil must include at least one word or expression indicating the company’s main activity. Company names cannot include swear words or expressions which may be offensive or immoral.
The selected type of legal entity also needs to be shown in the company same – for instance, “Ltda” or “Sociedade Limitada” for limited liability partnerships, and “Companhia”, “S.A.” or “Sociedade Anônima” for corporations.
10. Have you undertaken a Brazilian trademark search?
The Brazilian National Institute for Intellectual Property (“INPI”) has a unified database of all trademarks registered publicly available. Conducting searches on the INPI database is fairly straight forward and can be done online at any time.
Brazil adopts the first-to-file principle. Therefore, it is strongly recommended that you file trademark applications as soon as you form a view that you may sell products or services in Brazil. These applications can be made by the Brazilian company, or by any individual or foreign entity (and there are important tax consequences to this). For further information, click here.
11. Have you considered what licences will be required for the Brazilian company to operate and how long it will take to obtain them?
Different businesses and activities may require one or various licences to operate in Brazil. Food, agricultural related activities and mining are well known for the various steps required to be taken to obtain their respective licences.
Licences can take a long time to be granted by authorities. Hence, it is very important that you ascertain the requirements and allow for reasonable estimates when planning the start of your Brazilian operations.
12. Are you planning for the Brazilian company to import goods? Have you checked the applicable import requirements?
Not all Brazilian companies are allowed to import goods from abroad. Before a company can import goods, it must obtain registration with the Foreign Trade Integrated System (“Siscomex”). In broad terms, there are three types of registration available:
- express, which only allows for a total of US$50,000 worth of goods to be imported every six months;
- limited, which allows for a total of US$150,000 worth of goods to be imported every six months; and
The Brazilian Federal Revenue (“RFB”) will analyse the Brazilian entity’s “financial capacity” when deciding which of the three types of registration will be granted. This analysis is undertaken by the RFB every six months and is based on the sum of corporate income tax (“IRPJ” ), the Social Contribution on Net Profits (“CSLL” ), PIS and COFINS (these being levies), as well as the amount of Social Security that the company paid for its employees in the previous five years.
Where a new company has been operating for less than five years, it may apply for a licence with a higher threshold if it can establish that it has sufficient net assets to meet its import-related obligations.
In addition to Siscomex registration, different licences may need to be obtained depending on the type of product to be imported. These licences may be under the jurisdiction of different bodies such as the Ministry of Agriculture (“MAPA”), the National Health Registry Agency (“ANVISA”), the Ministry of Defence and the Foreign Trade Chamber (“Camex”), among others.
13. Have you decided on the bank that will hold the company’s account?
Opening a bank account in Brazil may take between one to two months (even longer in some cases). Thus, it is important to confirm with your bank of choice the timeframe required for approvals and allow for possible delays, which are, unfortunately, frequent.
Some banks require different registration processes to open a current account and for the company to be able to buy and sell foreign exchange. In some cases, depending on how quickly the company needs to start operating, smaller banks are used. Also, it is not unusual for companies to hold an account with a foreign exchange specialist bank, as the larger banks tend to be very compliance-intensive for small and medium-sized companies (especially those that are not listed on any stock exchange).
Final words of warning
Setting up a company abroad invariably has various consequences and risks. Seeking advice before making a decision will avoid many pitfalls and costs down the track. The questions above are just some of the many issues that you will need to consider before registering a company in Brazil.
Contact me if you require further information.
Last modified: March 9, 2020